8 Investing Strategies Explained

Whether you are putting money aside for retirement or trying to make your savings work harder, having a clear investment strategy can play an important role in your financial decision-making.

An investing strategy is a plan that guides how you allocate your money across different assets based on your financial goals, risk tolerance and time horizon. This guide explains eight widely used investing strategies including growth investing, value investing, index investing and income investing. It examines how these strategies differ and what factors are worth considering when choosing an approach.

The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.

What Is an Investment Strategy? 

An investment strategy is a set of principles that shape how an investor builds and manages their portfolio. It typically takes into account the following three factors:

• Risk tolerance: How comfortable you are with the risk of losing money. 
• Time horizon: How long you plan to keep your money invested. 
• Financial goals: Whether you are investing for capital growth or regular income. 

No single strategy will suit every investor. For example, the right approach for a young person investing for retirement looks different to the approach taken by a retiree looking for a steady income.  

Understanding the range of options available is a useful starting point for anyone looking to build a portfolio, whether they are new to stock market investing or looking to refine an existing approach. 

How to Choose an Investing Strategy

The investing approach that suits you will depend on your unique personal and financial factors. Before choosing a strategy, it’s worth asking yourself questions such as the following: 

What Are Your Financial Goals?

Are you investing to grow your wealth over the long term or generate a regular income? Your ultimate goal will play a large part in determining which strategies are worth considering. An investor focused on long-term capital growth may gravitate towards growth investing or index investing, whilst someone seeking regular income may find income-focused strategies more appealing.

What Is Your Risk Tolerance?

Risk tolerance refers to how comfortable you are with the possibility that your investments may fall in value before recovering, if they recover at all. Generally speaking, strategies with higher potential returns tend to carry higher levels of risk. Understanding your own risk appetite is an important part of narrowing down your options. 

What Is Your Time Horizon?

Your time horizon is the length of time you expect to keep your money invested. Longer time horizons can allow investors to ride out periods of short-term market volatility, which may make certain approaches more viable. On the other hand, a shorter time horizon may call for a more cautious approach. 

How Involved Do You Want to Be? 

Some investing strategies require regular monitoring and decision-making, whilst others are designed to be largely hands-off. Your interest and confidence in actively managing investments will play a part in your decision making process.

Active vs Passive Investing

Investing strategies typically fall into two categories: active and passive. Active strategies tend to involve regular decision-making and portfolio management, whilst passive strategies aim to track the market with minimal intervention.  

Before exploring individual strategies, it’s worth understanding the distinction between active and passive investing, as this shapes how most strategies are implemented. 

Active Investing

Active investing involves making ongoing decisions about which assets to buy, hold or sell - with the aim of outperforming the broader market. Active investors, or the fund managers they invest through, tend to conduct research and adjust their portfolios in response to changing circumstances. 

An active approach can offer greater flexibility and the potential for higher returns, but it also tends to involve higher costs, more time and a higher level of risk. Furthermore, research consistently shows that the vast majority of actively managed funds underperform their benchmark index over the long term. 

Passive Investing 

Passive investing takes a different approach. Rather than trying to beat the market, passive investors attempt to match it. This is typically done by investing in mutual funds or Exchange-Traded Funds (ETFs) that track a market index, such as the FTSE 100 or S&P 500. 

Because passive strategies require less frequent trading and minimal management, they generally carry lower fees than actively managed funds. For many investors, particularly those with a long time horizon, this cost efficiency can have a meaningful impact on overall returns.  

8 Top Investing Strategies Explained

There are many different approaches to investing, each with its own characteristics and risk profile. The following eight are among the most widely discussed. However, this is not an exhaustive list, and many investors choose to combine more than one approach. 

1. Growth Investing

Growth investing is a strategy which targets companies that are expected to grow at a faster rate than the market average. Growth investors typically focus on businesses with strong future earnings potential.  

The companies themselves also tend to be focused on growth. Consequently, rather than paying out dividends, growth stocks typically reinvest profits back into the business to fuel further expansion. As a result, growth investors generally aim to profit from rising share prices rather than regular income. 

2. Value Investing

Value investing involves identifying stocks that appear to be trading below their intrinsic value, in other words, companies that the market may have undervalued.  

Value investors look for businesses with solid fundamentals which aren’t reflected in the company’s share price, perhaps due to short-term market pessimism or economic uncertainty. 

This approach is closely associated with Warren Buffett and Benjamin Graham, who both argued that patient fundamental analysis could identify opportunities that the wider market had overlooked.

3. Income Investing

Income investing prioritises building a portfolio that generates regular income. Investors who take this approach typically look for assets that pay consistent dividends or interest. 

Common income-generating assets include dividend-paying stocks, bonds and Real Estate Investment Trusts (REITs). The strategy is usually associated with investors who want their portfolio to supplement or replace earned income, such as those in retirement.

4. Buy-and-Hold Investing

Buy-and-hold investing is a long-term strategy in which investors purchase assets and hold them for an extended period, often years or decades, regardless of short-term market fluctuations. Rather than attempting to time the market, buy-and-hold investors trust that the value of their investments will grow over a long time horizon. 

This approach is closely associated with passive investing and is one of the most widely practised strategies among long-term retail investors. It requires relatively little ongoing management once a portfolio is established, making it popular for those without the time or inclination to monitor markets closely. 

5. Index Investing

Index investing is a passive strategy that involves investing in funds which track the performance of a specific market index, such as the FTSE 100 or the S&P 500. Rather than attempting to select individual stocks or outperform the market, index investors aim to mirror its overall performance. 

This is typically done using mutual funds or ETFs, both of which pool investor money to replicate the holdings of an underlying index. Because they require minimal management, these products tend to carry lower fees than actively managed funds.

6. Momentum Investing

Momentum investing is based on the premise that assets which have been rising in value will continue to do so, at least in the short to medium term. Momentum investors look for assets exhibiting strong recent performance and aim to capitalise on the continuation of that trend, exiting positions before the momentum reverses. 

Unlike the other strategies covered in this guide, momentum investing is more akin to a trading strategy, as it typically involves shorter holding periods and more frequent portfolio adjustments. It often relies on technical analysis to identify current trends as well as entry and exit points.

7. Dollar-Cost Averaging

Dollar-cost averaging (DCA) is an investment approach in which a fixed sum of money is invested at regular intervals regardless of market conditions. Rather than investing a lump sum at a single point in time, the investor spreads their exposure over time, buying more units when prices are low and fewer when prices are high. 

The approach is straightforward to implement and is commonly used by investors contributing regularly to an investment account. Dollar-cost averaging is perhaps more accurately described as a method of deploying capital rather than a standalone strategy, but it is widely discussed alongside investing strategies because it can be applied in combination with most of the approaches covered in this guide. 

8. Contrarian Investing

Contrarian investing involves deliberately going against the prevailing market sentiment, buying assets that are out of favour and selling those that the wider market appears to be overvaluing. The underlying premise is that markets periodically overshoot in both directions, creating potential opportunities for investors willing to take a position that runs counter to the crowd.

In practice, contrarian investors look for assets that have fallen sharply in price due to negative sentiment or short-term news, with the expectation that their value will eventually be recognised. It shares some characteristics with value investing but places greater emphasis on market psychology and sentiment as drivers of mispricing.

Investing Strategies Compared

The table below offers a brief overview of who each strategy is most commonly associated with. 

Combining Investing Strategies and Diversification

The eight strategies covered in this guide are not mutually exclusive, many investors draw on elements of more than one approach in a single portfolio. A few common examples of combined approaches might include: 

• Core and satellite: Maintaining a passive index fund as the core of a portfolio, whilst allocating a smaller portion to an active strategy such as growth or value investing. This approach aims to combine the cost efficiency of passive investing with the potential upside of active stock selection. 
• Income and capital appreciation: Combining income-generating assets, such as dividend-paying stocks or bonds, with a growth-oriented allocation, with the aim of balancing regular returns against longer-term capital appreciation. 
• Dollar-cost averaging into an index: Using a regular, fixed contribution to gradually build a position in an index fund over time. This is one of the more straightforward blended approaches and is commonly associated with long-term retirement planning. 

The Role of Diversification

Portfolio diversification involves spreading investments across different asset classes, sectors and geographies, with the aim of reducing the overall impact of any single investment performing poorly. The underlying principle is that different assets tend to respond differently to the same economic conditions.

It is worth noting that diversification does not eliminate investment risk entirely; however, it is a widely used approach to managing risk in an investment portfolio.

How to Build an Investment Strategy

Developing an investment strategy is a personal process that will look different for every investor. The following steps offer a broad framework that many investors work through, though the right approach will depend on your individual circumstances: 

1. Define your financial goals: Consider what you are investing for, whether that’s long-term wealth building or generating regular income. 
2. Assess your risk tolerance: Reflect on how comfortable you are with the possibility of your investments falling in value, particularly in the short-term 
3. Decide on your level of involvement: Consider whether you prefer an active or passive strategy
4. Explore the strategies available: Use the sections above to identify which approaches align with your goals and circumstances. 
5. Consider diversification: Think about how to spread your investments across different asset classes, sectors and geographies to manage concentration risk 
6. Review periodically: Revisit your strategy as your circumstances change, and consider seeking professional financial advice if you are uncertain about any aspect of your approach 

Conclusion

There is a wide range of investing strategies available to those looking to put their money to work in the financial markets, from the relative simplicity of buy-and-hold and index investing to the more active demands of momentum and contrarian approaches. 

Understanding the differences between these investing strategies is a useful starting point for anyone looking to build or refine their approach to the markets. No single investment strategy is universally suitable for everyone; indeed, many investors find that combining a variety of approaches better suits their goals.  

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